Question

Financial information for Forever 18 includes the following selected data:

($ in millions)20182017Net income$129$308Dividends on preferred stock$20$15Average shares outstanding (in millions)150400Stock price$12.02$10.97\begin{matrix} \text{(\$ in millions)} & \text{2018} & \text{2017}\\ \hline \text{Net income} & \text{$\$ 129$} & \text{$\$ 308$}\\ \text{Dividends on preferred stock} & \text{$\$ 20$} & \text{$\$ 15$}\\ \text{Average shares outstanding (in millions)} & \text{150} & \text{400}\\ \text{Stock price} & \text{$\$ 12.02$} & \text{$\$ 10.97$}\\ \end{matrix}

  1. Calculate earnings per share in 2017 and 2018. Did earnings per share increase in 2018? 2. Calculate the price-earnings ratio in 2017 and 2018. In which year is the stock priced lower in relation to reported earnings?

Solution

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We are going to use following claims:

EPS=Net income- Preference dividendAverage outstanding sharesPrice earnign ratio=Stock Price EPS.\begin{align*} &\boxed{\text{EPS} = \dfrac{\text{Net income- Preference dividend}}{\text{Average outstanding shares}}} \\\\ &\boxed{\text{Price earnign ratio}=\dfrac{\text{Stock Price }}{EPS}.} \end{align*}

Let's work out our problem: In our case, in 2017., net income of company is $308\$ 308 million.

The company paid dividend of $15\$15 milion on preferred stocks. Outstanding shares of the company is 400400 milion and stock price is $10.97\$10.97.

Then, in 2018. , net income of company is $129\$ 129 milion. The company paid divident of $20\$ 20 milion on preferred stocks. Outstanding shares of the company is 150150 milion and stock price is $12.02.\$ 12.02..

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